In a move aimed at improving the returns for its over 65 million subscribers, the Employees’ Provident Fund Organisation (EPFO) may increase its exposure to equities via exchange traded funds (ETFs) up to the maximum permitted level of 15% of annual investible funds in the next fiscal.
The 15% ceiling was never fully used by the EPFO; in FY23, only a little over 10% of incremental deposits by the subscribers got invested in ETFs.
The move is prompted by the attractive returns from ETF investments after the pandemic and a trend of declining income from a chunk of its debt investments, forcing it to sell ETF investments to find resources for interest payouts to the subscribers.
According to sources, the Central Board of Trustees (CBT), which met here on Monday and Tuesday, gave “an in-principle approval” to the retirement funds body to invest up to 15% of its annual incremental deposits in ETFs that replicate the portfolio of either BSE Sensex Index or NSE Nifty 50 Index.
“At present, the EPFO invests about 10.03% of the proceeds in ETFs. There is scope to increase it to the 15% cap,” said a source familiar with the development. Another source said that the in-principle approval will have to be analysed further and a final proposal may have to be brought to the CBT.
The move, if it goes through, would also bring some cheer to the stock market, which has been seeing volatility amid the global economic uncertainty.
Under current investment norms, the EPFO can invest anywhere between 5% and 15% of the annual incremental deposits received in ETFs, while the balance is invested in debt securities. It began investing in equities through ETFs in 2015-16 with a 5% exposure; the cap was raised to 10% in 2016-17 and 15% in 2017-18. A proposal to further hike it to 20% has been hanging fire (the EPFO’s Financial Investment and Audit Committee recommended the step in December 2021).
As on January 31, 2023, EPFO had investment holdings at face value of about Rs 12.53 trillion, of which about a cumulative `1.25 trillion was in equities and related investments.
EPFO’s investment in ETFs is made based on Nifty 50, Sensex as well as CPSE and Bharat 22 Indices. Its ETF investments so far have exceeded Rs 2 trillion, including over Rs 40,000 crore in FY23.
ETF investments have clearly outperformed the debt portfolio in the last three years. The notional return from equity investments were 14.67% and 16.27%, respectively, in FY21 and FY22 against the 10-year G-sec rates of 6.42% and 6.96%, respectively. The corresponding figures for FY23 are not immediately available, but the EPFO’s income from ETF investments in the year is pegged at `10,933 crore, including `5,649 crore as capital gains from the sale of units in the funds.
Major share of its income continues to come from interest earned from investments in debt, including government bonds and corporate paper.
Meanwhile, the EPFO continues to hold on to about `4,500 crore of investments in downgraded securities of companies, including the erstwhile Dewan Housing Finance Corporation (DHFL), IL&FS and Reliance Capital. The retirement fund manager has now taken a call on what to do with these at the moment and whether to “shave off” the amount from its corpus. “These are parked as risky investments at the moment and we are waiting to see if some of the amount can still be realised. But it does not make much of a dent to the EPFO’s corpus and the rest of the investments continue to remain safe,” said a source.
